Reserve Bank of India Governor Yaga Venugopal Reddy almost always surprises the market. This time around, bankers and economists are vertically split if he would hike the repo rate or the cash reserve ratio or do both. But sources close to RBI say it’s likely that Reddy may prefer to wait and watch.When inflation for the week ending June 7 had jumped to a 13-year high of 11.05 per cent — from the previous week’s figure of 8.75 per cent — on June 24, Reddy, without waiting for the review, hiked both CRR and repo rate by 50 basis points each. In effect, since the beginning of this fiscal year, CRR has gone up by 125 basis points and the repo rate by 75 basis points.“It won’t be a surprise if the RBI lets the effect of these hikes play out before intervening again,” said the source.Since June 24, inflation has touched yet another high of 11.91 per cent for the week-ended July 5 before marginally dropping to 11.89 per cent the next week.Sources said the RBI is likely to make some changes in prudential norms of banks and also revise upwards the risk weightage of certain sectors such as real estate where credit flow was beyond the central bank’s comfort levels. They pointed out that the growth in money supply had dropped to 20.5 per cent as on July 4 compared with 21.8 per cent a year ago. Moreover, global crude oil prices had shown some signs of softening dropping from their peak of $147.27 a barrel on July 11 to $124 a barrel today. While Finance Secretary D Subbarao said in a television interview in Tokyo that a rate hike looked like an “obvious solution” when asked if the RBI would act tomorrow to contain prices, Reddy may have some other plans. The Governor on Saturday met Finance Minister P Chidambaram for the second time in the last fortnight. Though described as a customary meeting ahead of the policy review, sources said the impact of further monetary tightening on the economy’s growth prospects could have been discussed.In an interview to The Indian Express on Friday, Chidambaram had admitted there was a trade-off between inflation and growth. “There is high inflation and if policy rates are to be adjusted for that, it will impact growth. What we are trying to do is balance it to the extent possible. But I have already said, inflation control is top priority. So, for that purpose, if we have to sacrifice a bit of growth, so be it,” he had said.
